Video site Youku’s IPO raises $203m

Youku, China’s largest online video company, raised $203m in its initial public offering and saw its shares surge more than 100 per cent in early New York trading on Wednesday.

Many investors appear to have bought into the view that such sites, which have seen soaring revenues, have huge potential in China’s booming economy.

But some analysts have highlighted the risks that Chinese online video companies face.

The market is subject to fierce competition, users are averse to paying for content and rampant copyright violations make monetisation in their home market more difficult than in the US.

Tudou, Youku’s largest rival, has also filed for a US IPO, but there is no date for the offering yet.

Youku lost Rmb167m ($25m) in the first nine months of this year, according to its listing prospectus. Tudou’s loss was Rmb83.7m. Their performance contrasts with reports that Hulu, the US online video site backed by media groups NBC Universal, Disney and News Corp, started making a profit late last year.

Even Gong Yu, chief executive of Qiyi.com, the online video site set up by Baidu, China’s leading online search engine, has called his business an “unhealthy industry”.

“Due to the overall positive outlook for the online video business there is an IPO wave right now, but the huge operating costs still raise doubts over the video sites’ monetisation model,” said EnfoCapital, a venture fund, in a research note.

“In the short term, advertising will continue to account for more than 90 per cent of [Chinese] online video companies’ revenues,” said Ivan Lee, EnfoCapital vice-president.

Industry executives estimate that online video sites attract less than 5 per cent of China’s online ad spending.

“However, as users develop a sense for copyright protection and market segmentation proceeds, we believe user-paid revenue models will become more significant over the years,” Mr Lee said.

Youku has started partnering with China’s state-owned telecom operators to offer subscription-based channels with original video content.

Tudou is investing in the production of original content which it has started selling on to traditional broadcasters.

But as these new revenue sources will take time to gain momentum, investors’ expectations for now are driven by the fast growth in China’s online video market.

China had Rmb621m in online video revenues in the third quarter, up 148 per cent from the same period last year, with Youku taking a 20.2 per cent share, according to Analysys, an internet research firm affiliated with EnfoCapital.

Youku’s revenues in the first nine months of this year rose 135 per cent compared with the same period in 2009.